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February 25, 2007
Time to check the money trail
In the last two weeks we've seen three management companies being investigated for their mishandling of association funds. In at least two of the cases, the firms have closed, with embezzlement charges looming over the principals. In two other situations, long-time board members, with apparently unchecked access to association funds, are also now accused of mishandling them. The hundreds of associations involved are now going to go through a miserable time, with accusations flying back and forth, and litigation that will probably go on for years, not to mention the costs that will be involved. The ultimate responsibility will lie with the board members,current and past, who failed to make sure the association's funds were being handled properly.
There are a few simple things a board can do to reduce the risk in the handling of association funds. Start with where the money is kept and how the transactions are reported. With electronic banking becoming more readily available to associations, it gives associations the ability to have more than one person review the transactions. Some banks, that cater to community associations, can allow the entire board to view (not create or change) all banking transactions, including the viewing of both sides of any check written, so you can also see who cashed it. You can also set up electronic approvals, so that when a check is authorized, another party has to log in to the account and approve the transaction before the money is sent. In most of the cases, the perpetrators would not have been able to get away with their actions for so long a time if the board had required the electronic approval, or had just looked at who was cashing the checks.
In the past, requiring second signatures, or separate approval (by a board member), was time consuming and costly. That is disappearing. If your management company, or bank, can't provide these simple measures now, you might want to start giving them a jab in the ribs, to help move them into the 21st centrury. Transparency in financial transactions should be the standard, not the exception.
Second, especially if you're self-managed, always require two signatures on any check over a certain amount, say $500. No one person should be able to write checks, or transfer association operating or reserve funds.
Third, I am still amazed at the number of associations who fail to have an annual, independent review of their financial records. Even when required in the CC&R's or Bylaws, associations resist spending the money to have a qualified accountant look at the books. First, IT'S NOT YOUR MONEY!!! It's care was entrusted to you to either handle directly, or to retain someone to do it for you. In any event, you should want ot be able to show the owners that you handled that job carefully, and you do that by having someone examine the books and records and provide a report. That person(s) should be an independent, qualified Certified Public Accountant, preferrably with knowledge of community association finances, not the bookkeeper down the street, nor the Treasurer's brother-in-law, who promise to do it a little cost. The board should obtain at least 3 proposals from qualified CPA's, and include the requirement that the CPA or firm has no ties to the association board, officers, or management firm.
There are three different formats the examination of the books can take: Audit, Review or Compilation
A financial audit, (sometimes called a certified audit) or more accurately, an audit of financial statements, is the examination by an independent third party of the financial statements of an association, resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. The books and records are tested according to Generally Accepted Accounting Principles (GAAP).
A "Review" is performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with GAAP.
A "Compilation" is presented in the form of financial statements that is the representation of management without the accountant undertaking to express any assurance on the statements.
Obviously, only the full audit can give a board any reasonable assurances as to the accuracy of the financial reports. But since its also the most time-consuming and therefore most expensive, its often not done. Here's some "rules of thumb" to help you in making your decision:
You should have the full audit if:
Your documents or state law require it
You change management companies
You just assumed control of the association through transition from developer control
Your Treasurer can sign checks and you change Treasurers
You may have a review if:
If your documents or state law allow it
Your association has had a full audit within the last two years
You have very little in the way of association income and expenses
You may have a compilation if:
I really don't see any reason why you would have a compilation. There are no tests or checks of any substance to see if the reports are accurate.
You may have noticed that I didn't make any differentiation between large and small associations or between condo's and HOA/POA's. That's because there is no hard and fast rule as to the dollar amount that would require an audit as opposed to a review. Baiscally, if you're a small association, there's probably no harm in having an audit every three years and reviews during the intervening years, as long as one of the other audit criteria doesn't come into play. However, if you're a large association, handling large sums of money, then the annual audit is the only way to go.
Last, but not least, is the issue of Fidelity Bonds. Often an association will rely on a management company's bond, but what they may not be aware of is that this often only protects the owner of the management company from theft by an employee. It might not protect the association if it is the owner who is, in fact, stealing the funds, as it appears to be in some of the above cases. An association should always have its own Fidelity Bond on everyone who has access to the funds.
Remember:
Its not your money
It's only been entrusted to you, not given
Better safe than sorry
It's not your job to keep assessments low, but to spend the money wisely!
Posted by joewest at 10:14 PM
February 18, 2007
Not Just in the North
The International Association of Fire Chiefs just put out a press release saying that the last two weeks have been one of the deadliest periods on record for fire deaths in residences. I know that not a day has gone by recently, that I haven't seen two or three stories about fires in condos or HOA's. Some have been large and some fatal. And -- not all have been in the north, where furnace, fireplace and heater fires are expected.
I think a lot of this has to do with people who don't the time or resources to take some type of preventive measures, as well as just taking things for granted. So why not bring it front and center for the people in your community.
Start with a special notice highlighting the potential problems (common walls, attics for condo's - proximity of buildings for HOA's) and asking them have they done the following:
Had the furnace cleaned and inspected?
Had the fireplace and chimney cleaned and inspected?
Do they have any candles anywhere near flammable material, such as drapes, table cloths etc.?
When was the last time they tested the smoke detector, or changed its/their batteries?
What's the expiration date on your fire extinguisher? Do you have a fire extinguisher?
If you have a number of elderly people in your community, why not form an ad hoc committee to help them out? Test their smoke detector, change the batteries, check the furnace cleaning date, see if they boil water for tea or coffee on the stove, or if they have a hot water pot with an auto shut-off? Are they using room space heaters to cut down on heating bills (aid programs might help here)? In other words, help look out for a neighbor's safety.
As an association:
Do you have a rule requiring grills or barbecues to be at least 10' from a structure's walls?
If you have common building, or pool equipment rooms, when was the last time you checked heaters, chimneys, alarms, etc.?
Do you know when - or if, the fire hydrants have been checked
Are the fire lanes clear - I mean really clear?
It really doesn't take a lot to make a community a little safer from fire. It takes a lot to wade through the ashes of a multi-family building trying to help them find any memento to take to their temporary residence.
Posted by joewest at 2:24 PM
February 9, 2007
'Fox and Friends' Omits Key Facts in Phony Flag Flap
From the "News Hounds" blog:
For three days, "Fox and Friends" has been pushing the story of a condo association telling a woman whose National Guard son is in Afghanistan to take down an American flag. Like the typical Fox News story, it's not as bad as it sounds. With video."Fox and Friends" co-hosts Steve Doocy, Gretchen Carlson, and Brian Kilmeade began their crusade on Tuesday with a story about a condo association in Connecticut telling Teresa Richard that she cannot fly the American flag. They followed up Wednesday with an interview on set with Richard, who explained that her son always asks about the flag when he calls her from Afghanistan.
On Thursday (February 8, 2007), Doocy & Crew were at it again, this time with an interview with comedian Jackie Mason, who pledged to have his attorney fight for Richard.
All three days, the Doocy crew insisted that the condo association had told Richard that she could not fly the flag.
It makes a great story -- the kind that stimulates the blood of all those geriatric Fox News viewers.
But it turns out other people at Fox News actually bothered to do a little reporting and found out the flap is not about the flag, but the flag pole.
From FoxNews.com comes this news:
"Kevin Carson, president of the Stoughton Ridge Condominium Association, told FOXNews.com that the five-member board would allow Teresa Richard to keep her American flag and Blue Star Mothers of America flag flying outside of her condo, provided she moves the flagpole to a stony area near her driveway.
"'We're not hard-nosed; we were trying to work with her,' Carson said. 'And it's not about patriotism; it's only about where you put the flagpole.'
"Condo rules for this 60-unit complex north of Hartford, Conn., stipulate that flags can only be flown from front entries, wood trim or deck railings. The rule was passed in 2004 after two residents — Carson included — erected flagpoles near their driveways. Those poles were grandfathered into the rules.
"'Being a condo, you can't have people just putting flagpoles up willy-nilly about the property,' Carson said. 'It interferes with the mowing of the lawn, it's all contractual work and so forth, and there are underground utilities feeding the condos.' ...
"Carson said that the issue all along has been the flagpole and not the display of the flag.
"'The issue is not the flags; it was never the flags,' Carson said. 'It's the flagpole in the middle of the lawn.'"
Furthermore, according to FoxNews.com, the first flag Richard flew was so big that it almost touched the ground, which would be disrespectful to the flag.
So there is no rule against flying the flag. It's only an issue of where to fly it and whether to let the flag touch the ground. But that doesn't quite make the blood race with outrage in the same way.
They put together a nice set of video clips about the reporting:
Posted by joewest at 10:03 AM
February 5, 2007
Religion and Community Associations
In Florida this past week, a high-rise condominium association directed a resident to remove a mezuzah from their exterior door frame. The resident immediately shouted "discrimination" citing the earlier presence of Christmas wreaths on many doors throughout the building. There's a lot of issues built in to this one - the resident is a renter, not the owner; Christmas wreaths are temporary, seasonal and removable - mezuzah's are supposed to be permanent; it was placed on a common area, not a limited or owner-controlled area; no request for the alteration was ever submitted. For your information, mezuzah refers to one of the 613 commandments in Judaism, which requires that a small parchment (klaf) inscribed with two sections from the Torah's Book of Deuteronomy (6:4-9 and 11:13-21) be affixed to each doorpost and gate in a Jewish home and business (from Wikipedia).
This is very similar to a situation in Illinois a few years ago, that resulted in legislation forbidding condo or HOA associations from prohibiting this display. It is likely that you'll see the same thing in Florida soon. In addition, a number of other states have had incidents involving religious displays that were contrary to association rules or guidelines. Most associations have worked out the seasonal display issues, most notably Christmas displays, although the size, duration and lighting of these still create periodic news stories. But these are never going to go away. Why, because the communal part of community association relies to some degree on conformity and uniformity, as well as civil obedience, and where religion is concerned, one may not always assume a resident agrees that the rulings in some document have a priority to their religion.
Eventually, the states will adopt legislation allowing religious displays, but also allowing the association some degree of control when they involve common or limited common areas, and some control over size and duration, similar to the "Right to Fly the American Flag" Act. So why not put that into the CC&R's now, and avoid the rush. You can't possibly address every religion and its specific requirements, but you could allow for small items to be attached to door frames that would be removed when the resident moves and restored to original form (condo); for exterior displays to be allowed for a 30 day period with lighting that goes off at 10:00pm; etc. This is a good area to include in any survey that you might be considering regarding the interaction of the owners and the association.
Religion, like the flag, is a "no-win" argument. Even if the board has to enforce the rules, and does so with an even and fair hand, they're still going to come off looking like they're discriminating against someone or their religion. They US is becoing more diverse in the religious beliefs of its citizens, and the association should reflect these changes.
Posted by joewest at 11:16 AM